Utility Market 101

The utility business is unlike any of an electrical distributor's other core market segments. That's because the customers, products, market traditions and knowledge needed to succeed in the utility market are much different from those required in the commercial, industrial and residential markets — which we covered earlier in the Electrical Market 101 series on electrical distributors' key markets. Because of these differences, far fewer electrical distributors pursue the utility business. All the same, it's still a surprisingly sizable market for many companies in the electrical wholesaling industry. This article is intended as a training guide or refresher course for salespeople, new employees or support staff at electrical distributors, manufacturers or reps for utility products.

The utility market tends to be a very cyclical business, and double-digit swings in spending on utility projects are not at all uncommon. McGraw-Hill's 2011 Construction Outlook said electric utility construction will slide 10 percent this year, falling for the third year in a row after a record high in 2008. The report said, “Alternate power projects, such as wind and solar, are assuming a greater share of the electric utility total, and these projects tend to be smaller in scope than the massive gas-fired plants of recent years.” In fact, of the 10 largest utility projects that McGraw-Hill said broke ground last year, seven were for wind farms.

Despite the cyclical nature of the business, the utility market still provides a steady stream of income for those electrical distributors that specialize in it. According to the 2011 sales forecasts in Electrical Wholesaling's Market Planning Guide, electrical distributors will sell approximately $4.63 billion in utility products this year — 5.5 percent of all electrical products sold. These products include, but are not limited to, pole-line hardware, high-voltage wire and cable, transformers, fuses, cutouts, panelboard equipment and safety supplies, as well as MRO supplies for use at generating plants such as metering equipment, tools and replacement lamps. For more information on electrical equipment and related supplies that distributors sell to utilities, check out “Key sales opportunities in the utility market” on page 31.

As is the case in all markets, you're known by the lines you carry. One independent manufacturers' rep who has sold utility products for years says an electrical distributor is really not a player in the utility market if it does not carry a strong switchgear line such as S&C Electric Co., Chicago, which dominates the utility switchgear niche; a good line of transformers; and one of the primary high-voltage wire and cable manufacturers, such as General Cable Corp., Highland Heights, Ky., or Southwire Co., Carrollton, Ga.

Distributors that have succeeded in supplying utilities with their emergency, MRO or general supply needs tend to be either full-line electrical distributors with a time-tested specialty in the business, or niche distributors that focus just on the utility market. Some examples of full-line distributors with a strong emphasis on utility work include Border States Electric Supply, Fargo, N.D.; Graybar Electric Co., St. Louis, Mo.; Kriz-Davis Co., Grand Island, Neb.; WESCO Distribution Inc., Pittsburgh; and Stuart Irby Co./Sonepar USA, Jackson, Miss. Some industry insiders say HD Supply, Atlanta, is the largest of all utility distributors, but because the company doesn't break out sales for its different divisions, it's tough to get a fix on its size.

When analyzing this market, you must also factor in several dozen specialist utility distributors that devote their entire business lives to serving utilities' supply needs. To learn a bit more about how these utility specialists, check out Electrical Wholesaling's online editorial archives at www.ewweb.com. Just go to the search engine in the right column and click on the Oct. 2006 issue, and then click on the link for the article, “The Power of Utility Specialists.” Many of these specialists are members of the 14-member North American Association of Utility Distributors (NAAUD), Lady Lake, Fla., a group of distributors nationwide with $1.4 billion in combined utility product sales that stock $180 million of inventory from 30 manufacturers in 170 locations across North America to service storm emergency needs.

The full-line electrical distributors with well-developed utility businesses tend to be quite large. For instance, the utility arm of Stuart C. Irby Co. supplies more than 650 electric utilities throughout the country. These utilities service more than 30 percent of all meters in the United States. At WESCO, utility business accounts for 13 percent (approximately $650 million) of the company's $5 billion in 2010 sales. While the company has historically been a big player in the utility market, it bolstered that niche with its acquisitions of several utility specialists, including Hamby Young and Herning Underground Supply. The company has 60 branches that focus on utility business.

Some of the reasons electrical distributors get involved in the utility market are deeply rooted in the electrical wholesaling industry's history. Graybar, for instance, has been in the utility business since the turn of the century, when many of the first power distribution systems in the U.S. were being built. The only markets for electrical supplies back then were in towns and cities where power companies were beginning to provide electrical service. Graybar set up many of its first branch locations in those markets to supply companies doing construction and maintenance of the new power grids. As power distribution systems grew in the U.S., many markets continued to have only one or two distributors that served utilities. This trend holds true today, as in many metropolitan areas just a handful of players compete in the utility market.

Most of the action for utility distributors is in products for the construction and maintenance of local distribution systems. This mix of products depends on whether the distribution systems in a distributor's market are underground, overhead or a combination of both.

Overhead distribution systems, in which the power runs along poles to local customers, were for years the service of choice. Utilities sent the power over high-voltage lines to substations, where it was redistributed to local customers via power poles. At the point of service, the power is stepped down with transformers to a voltage (most often 120/240V) that customers can use in their electrical systems.

For some time now, most new utility distribution systems have used underground service, where conductors run underground to customers from utility distribution substations. The power is produced at the utility generating plant and sent along overhead transmission lines to utility distribution substations, where it goes underground for distribution. The underground service goes first to pad-mounted distribution transformers and then on to the local hook-ups at the appropriate voltage for use by the utility's customers.

Although the initial cost of installing underground distribution systems is higher than that of overhead distribution systems, underground systems tend to be more reliable. There's less maintenance and repair because underground systems are protected from many causes of outages that overhead distribution systems must contend with, such as lightning strikes; automobiles crashing into power poles and knocking out service; storm damage; ice build-up and wet or snow-laden tree limbs that fall into distribution lines.

Knowing the Players

Utilities are commonly divided into three types:

Investor-owned utilities

These are the largest utilities in the land and tend to buy direct for most of their products. They serve thousands of customers.

Co-op utilities

These utilities, including the Rural Electric Associations (REAs,) tend to buy more frequently from distributors, and often serve smaller metropolitan markets or rural areas.

Municipally-owned utilities

These utilities service a small market area, often a town, city or county.

These utilities burn a mix of fuel to create power. According to the Edison Electric Institute, Washington, D.C., coal accounts for the lion's share of the generation mix at 44.4 percent, followed by natural gas (23.3 percent); nuclear (20.2 percent); hydroelectric power (6.8 percent); fuel oil (1 percent); and renewable power sources such as solar, geothermal and wind (3.6 percent).

The Impact of Deregulation

You can't talk about the utility market for very long without touching upon deregulation. The move to open up the utility market more than a decade ago so other companies could compete with the established utilities that had a monopoly to sell electricity in local markets hasn't had the intended effect of driving down the price of power for end users. But it has forced electric utilities to change how they do business. Following are a few examples.

Expansion into other markets

Along with selling kilowatts, many utilities always had other services to offer, such as the installation and maintenance of street lighting for towns, counties and states. But deregulation forced them to look at new markets, and they expanded into a much more extensive packages of services, including the design, installation and maintenance of indoor lighting, power quality and power distribution systems for industrial facilities, and sophisticated metering packages for the smart grid that allow their customers to analyze their own power usage.

Getting into electrical contracting

The idea of a utility fielding its own installation crew, whether made up of its own employees or of electricians sub-contracted from contracting firms, presents several potential challenges for your contractor customers. The installation, maintenance and design is obviously in direct competition with the services electrical contractors already provide. This practice raises another issue to watch because utility workers install electrical systems to specifications of a different safety code than do electrical contractors, which gives the utilities a price advantage.

Over the years, MDU Resources Group Inc., Bismark, N.D, emerged as a force to be reckoned with in the utility contracting business through the acquisitions of several electrical contractors that focus on this niche. It competes against other national contractors, such as Quanta Services Inc., Houston, for utility work.

Competing for customers motivated utilities to cut operating costs

Deregulation forced utilities to rethink how they purchase, stock and distribute electrical products that they use for their power systems, as well as MRO needs at their generating facilities. These are services distributors can provide.

Utilities are now major players in the installation and design end of the energy conservation market

In search of logical market extensions from their core business of providing power, over the years many utilities purchased energy service companies (ESCOs), which design, install and service energy-efficient electrical systems for many customers of electrical distributors. Several dozen ESCOs now exist in the U.S., and they tend to focus on big installations with Fortune 1000 corporations, schools, hospitals, universities and government offices. Many ESCOs are members of the National Association of Energy Service Companies (NAESCO), Washington, D.C.

Changing Expectations

All of these changes in the market have affected what utilities expect from distributors of utility products. Stability is a key concern, as are product and market expertise. According to one utility specialist, electric utilities are looking for much more than just the lowest price when they are shopping for a distributor to service one of their coveted long-term contracts:

An effective inventory management system

Utilities, more than many other types of customers, want the distributors they do business with to have their inventory on computer. That's because utilities must be able to rely on a distributor's assessment of product availability. During emergency situations or power outages, utilities have to know the products they need will definitely be in stock, so they can repair damaged equipment as soon as possible.

Prior performance and experience

As mentioned earlier, the utility market is not a game for amateurs, and utilities expect distributors to know the products they will need and the type of service they require. Utilities may also want to know which other utilities you are working with, so they can check these references.

Primary markets served

Utilities will evaluate electrical distributors based on the markets they serve because this will give them a good idea of what size of customer a distributor serves best. For instance, if an electrical distributor focuses on industrials and large-project work, it's less of a stretch to manage the volume and technical complexity of product that a utility often requires, than if that distributor's niche is light-commercial and residential work.

Brands carried and product mix

A distributor that carries heavy-commercial and industrial lines for manufacturers that also make utility products stands a better chance of making a smooth transition into the utility business than does a distributor that focuses on small commercial and residential jobs.

Geographic service area

Like any other customer, a utility needs reliable distributors that can deliver product on an on-call basis, 24 hours a day. Utilities outside an electrical distributor's primary service area lose the benefit of counter pickups, and run the risk that the deliveries may not be as dependable as that of a distributor with a branch in nearby.

Financial stability

Utilities don't want to run the risk of partnering with an unstable electrical distributor because it can take so long for them to develop effective supply sources.

An Exciting Future

There's a tectonic shift underway in the utility market right now. Much of it relates to the need to upgrade aging power and transmission infrastructure so it can handle the surging demand for electrical power, technological advances in how customers and utilities exchange data on electrical usage, and the construction of utility-scale, centralized power generations facilities for renewable energy sources such as wind farms, solar power, geothermal and other renewable. Toss in the challenges of satisfying what may one day be truly massive demand for more electricity to power electric vehicles, and dealing with the aftermath of a mostly failed move to utility deregulation that was supposed to provide customers with more choices for power providers, and you can see that utilities and the distributors, reps, contractors and manufacturers that work most directly with them now have plenty on their plates.

The pace of change has definitely picked up in this market, because historically things never changed too fast with electric utilities. Until deregulation, there wasn't much pressure on utilities to change. Most had a lock on the market area they served, a guaranteed customer base and regular rate increases. For years, most electric utilities grew at a slow-but-steady pace in the low single-digits. That all first started to change with deregulation and the move to provide customers with more choices for the power and other services that utilities provide. With the advances in communications, the smart grid, renewables, and the reconsideration of nuclear power, the utility market has a completely different look than it did even 10 years ago.

The scale of investment will hit the utility market over the next few decades is truly mammoth. Check out this report by the Edison Electric Institute at its website, www.eei.org: “As our country's demand for electricity continues to increase, the system must be expanded and upgraded to meet the needs of our growing population and digital economy. In order to build the system to better meet current and future demand, alleviate congestion, and to reinforce system reliability, electric companies have earmarked billions of additional dollars for investment in the coming decade.

“Shareholder-owned electric companies invested nearly $58 billion in the nation's transmission system from 2000 to 2008, and are expected to spend an additional $54 billion from 2009 to 2013. According to a 2008 report by The Brattle Group, the electric power industry will need to invest $298 billion in the nation's transmission system from 2010 to 2030 in order to maintain reliable service.”

Some of these dollars are already flowing into the smart grid. EEI Executive Vice President David Owens said in EEI's annual address to Wall Street that, “An influx of stimulus funding will help propel smart grid development, and overall industry capital investment is expected to be $80 billion in 2010, double what it was in 2004. The increasingly automated grid also will contribute to the growth of energy-efficiency programs, and these programs will continue to emerge both as a way of helping customers manage their bills as well as helping utilities better manage their generation resources.”

Tom Kuhn, EEI's president, said in his annual EEI President's Letter that electricity demand will grow one percent in 2011 — double the 0.5 annual percent growth rate during the 2000 to 2009 period — and 25 percent over the next 25 years. He said in that letter EEI member companies plan to invest more than $35 billion on transmission over the next three years, and that, “As part of its overall efforts to modernize the grid, the electric power industry is matching $3.4 billion in grant awards that the U.S. Department of Energy (DOE) disbursed as part of the American Reinvestment and Recovery Act (ARRA) in 2009. This public-private investment will total over $8 billion in new investment in the grid.”

The utility market is changing more rapidly than many other parts of the electrical industry. But by focusing on the market basics that this article outlines, you will have a better idea of what it takes for electrical distributors to win in the utility business.

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